A company is expected to increase dividends by 20% in year 1, and by 15% in...
A company is expected to increase dividends by 20% in year 1, and by 15% in year 2, after that, dividends will increase at a rate of 5% per year indefinitely. If the last dividend was $1, and the required return is 15%, what is the current price of the stock? (Hint: current price will be from NPV)
a. $6.90
b. $8.67
c. $9.66
d. $11.10
e. $13.04
Homework Answers
D1=(1*1.2)=1.2
D2=(1.2*1.15)=1.38
Value after year 2=(D2*Growth rate)/(Required return-Growth rate)
=(1.38*1.05)/(0.15-0.05)=$14.49
Hence current price=Future dividends*Present value of discounting factor(15%,time period)
=1.2/1.15+1.38/1.15^2+14.49/1.15^2
which is equal to
=$13.04(Approx).
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